LegCo Subcommittee on MPF System
Information Note
Winding Up of Schemes

Purpose

This paper describes the proposals regarding winding up of an MPF scheme, including :

  1. circumstances for the winding up of a scheme (paragraph 2-5);
  2. treatment of scheme benefits following the winding up (paragraph 6-7); and
  3. expenses of winding up a scheme (paragraph 8).

Proposal

Circumstances for Winding Up of a Scheme

2. There could be two types of scheme winding up under the MPF System :

  1. voluntary winding up; and
  2. compulsory winding up.

Voluntary winding up

3. Voluntary winding up will only be allowed for Employer-sponsored Schemes where the sponsoring employer of a scheme ceases to exist due to winding up, merger or acquisition of the company, or where the employer wishes to wind up the Employer-sponsored Scheme for joining a Master Trust Scheme to fulfil his MPF obligations.

4. In both cases, the employer has to initiate the winding up and the trustee has to obtain the consent of the MPFA before the scheme could be wound up. We do not allow trustees of Employer-sponsored Schemes or Master Trust Schemes to initiate voluntary winding up of the schemes themselves.

Compulsory winding up

5. The MPFA may apply to the court for an order for the winding up of an MPF scheme if it has reasons to believe that it is in the interests of the scheme members to wind up the scheme. A scheme will be wound up if it appears to the court that :

  1. the MPFA is unable to find any replacement trustee for the scheme after removing or revoking the original trustee from the management;
  2. the trust is unable to fulfill its obligations (e.g. unable to pay out benefits due to fraudulent acts of the fund manager); and
  3. it is just and equitable that the scheme should be wound up.

Treatment of Scheme Benefits Following the Winding Up

6. Scheme members’ accrued benefits derived from mandatory contributions must continue to be preserved according to the provisions in the Ordinance instead of being distributed to the scheme members for their disposal. The mechanism will be as follows :

  1. if the scheme members continue to be employed by the same employer following the winding up, their benefits should be transferred to the new MPF scheme of the employer instead of transferring to another scheme of individual scheme members’ choice;
  2. individual account holders (e.g. scheme members retaining dormant accounts in the original master trust scheme after change of employment) may transfer their accounts to any master trust scheme of their choice; and
  3. the transfer procedures will follow the normal portability mechanism.

7. The treatment of accrued benefits derived from non-mandatory contributions are to be governed by the relevant provisions in the Trust Deed and Rules of the MPF scheme.

Expenses of Winding Up

8. For voluntary winding up, we propose that all expenses relating to the winding up of a scheme should be borne by the sponsoring employer of the scheme. For compulsory winding up, the court should determine whether it should be the responsibility of the scheme trustee/concerned service providers or the MPFA for the winding up expenses. The responsible party should pay the expenses from their own resources rather than from the accrued benefits of the concerned scheme members.

Justification

Circumstances for Winding Up of a Scheme

Voluntary winding up

9. Winding up of a scheme is a process to orderly liquidate and distribute the assets and eventually to terminate the existence of a trust arrangement. We envisage that voluntary winding up of a scheme will happen when the scheme itself is still functioning properly but not viable to continue to operate and it is not against the interests of the scheme members to wind up the scheme.

10. Voluntary winding up will be allowed under an Employer-sponsored Scheme because the scheme itself is not an entirely independent entity, i.e. it is dependent on the existence of the sponsoring employer of the scheme. In the event where the sponsoring employer ceases existence, e.g. in winding up of a company and in mergers or acquisitions, it becomes not viable for the Employer-sponsored Scheme to continue to operate.

11. However, we do not propose to allow trustee to initiate winding up of a scheme voluntarily because of the fiduciary duty and obligations of a trustee in respect of an MPF scheme. This principle applies to both Master Trust Scheme and Employer-sponsored Scheme.

12. In the event where the trustee does not wish to continue to manage the scheme under trust (e.g. due to business reasons), the trustee has a duty not to cease management until he is able to find a replacement trustee. The scheme, being a separate entity from the trustee, should continue to operate regardless of the change of management of trustees. The issue of requiring the trustee to find a replacement before resigning as a trustee of an MPF scheme will be discussed in greater detail in the LegCo Information Note on Replacement of Trustees.

13. MPFA’s consent is required prior to voluntary winding up so that the MPFA can ensure that the winding up arrangements are smooth and will not harm the interests of scheme members. The MPFA will consider a number of factors before giving consent to a voluntary winding up of a scheme. These include :

  1. if the employer ceases to have an MPF obligation to the employees (e.g. winding up of the company), the MPFA will ensure that there are proper arrangements to wind up the scheme and to transfer the scheme benefits to other accounts of the scheme members; and
  2. if the employer continues to have MPF obligations to the employees (e.g. during mergers and acquisitions), the MPFA will ensure that there are proper transitional arrangements to maintain the scheme benefits, receive contributions and make benefit payments and eventual arrangements for transferring to a new scheme.

Compulsory winding up

14. The MPFA will only initiate compulsory winding up of a scheme if the Authority has grounds to believe that :

  1. it is no longer viable for the scheme to operate due to the absence of management;
  2. the scheme is not operating properly; or
  3. it is in the interest of the scheme members to wind up the operation.

15. Winding up of a scheme becomes necessary if the MPFA is unable to find a replacement trustee during removal and revocation of a trustee. We envisage that under such circumstances it is highly likely that the scheme itself already has serious operational problems and the interests of the scheme members may be adversely affected if the scheme is not wound up.

Treatment of Scheme Benefits Following the Winding Up

16. Scheme benefits should continue to be treated according to the provisions regarding MPF benefits. Unlike normal winding up of companies where the assets will be distributed to the creditors, the scheme benefits arising from mandatory contributions should not be paid to the scheme members for their disposal following winding up due to the principle of preservation in the MPF System. The transfer of funds following the winding up process should follow the principles for normal portability of accrued benefits. In other words,

  1. if the scheme member continues to be employed by the same employer after winding up of the MPF scheme (e.g. due to mergers), his benefits should be transferred to the employer’s new scheme. This is the basic principle of the MPF System that in order to facilitate administration work, all employees shall join their current employer’s selected scheme to handle the contributions deriving from the current employment;
  2. if the scheme member changes or ceases employment after winding up of the scheme, he can transfer the benefits to the scheme of the new employer or an individual account in another master trust scheme;
  3. if the scheme member has an individual account (e.g. a dormant account that holds the accrued benefits derived from the scheme member’s previous employment), he will have the flexibility to transfer the account to any master trust scheme he selects; and
  4. the scheme member can only withdraw the benefits for his disposal according to the conditions for withdrawal specified in the Ordinance.

17. Since non-mandatory contributions will normally be exempt from the requirement of preservation, portability and vesting, the employers and scheme members can make different arrangements regarding the treatment of such benefits in the Trust Deed and Rules of the MPF scheme under different circumstances. Such benefits will be treated accordingly in the winding up of a scheme.

Expenses of winding up

18. Since it is the employer who sponsors the setting up of an Employer-sponsored Scheme and decides to wind up the scheme, it is natural that the employer should be responsible for the voluntary winding up expenses. For compulsory winding up, the court will have the jurisdiction in determining who should pay for the winding up expenses and the amount to be paid. To protect the accrued benefits of the scheme members, the party ordered by the court to pay the expenses will not be allowed to use the MPF benefits of the concerned members to pay.

Mandatory Provident Fund Office
Financial Services Branch
4 March 1997

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